June 25, 2013

By Oliver Herzfeld

In a prior article (available here), I reviewed the laws of trademark licensor liability for injuries caused by defective licensed products. In a similar vein, the recent case of Gibson Guitar v. Viacom presents an excellent opportunity to review the laws of licensor liability for a licensee’s infringement of a third party’s trademarks.

Background

Gibson Guitars (just renamed Gibson Brands) sued Viacom and its trademark licensee, John Hornby Skewes, claiming a licensed toy ukulele featuring SpongeBob SquarePants infringed Gibson’s “Flying V” word and design trademarks. Gibson accused Viacom of being both contributorily and vicariously liable for JHS’ infringement because Viacom had knowledge of the infringement and, under the license agreement, Viacom must approve all licensed products and monitor and control the quality and distribution of such products. Contributory infringement is a legal theory that holds a party liable, even though the party is not directly infringing itself, if it has knowledge of the infringing activity and induces, causes, or materially contributes to (or enables) the infringing acts of others. Similarly, vicarious infringement is a legal theory that holds a party secondarily liable for the infringing acts of its employees, partners, joint owners and others to the extent such party has the authority to bind or exercise control over the primary infringer. The court considered each of the legal theories in turn.

Contributory Infringement

According to the court, when a direct infringer supplies a product as opposed to a service, “to be liable for contributory trademark infringement, a defendant must have (1) ‘intentionally induced’ the primary infringer to infringe, or (2) continued to supply an infringing product to an infringer with knowledge that the infringer is mislabeling the particular product supplied.”

Under the first prong, the court noted that Viacom’s approval and control of the quality and distribution of the licensed products was required because, under the U.S. Trademark Act, ownership of a trademark (in this case, Viacom’s SpongeBob mark) will be deemed abandoned if a licensor grants unrestricted use of its mark or otherwise fails to control the nature and quality of all products sold under a license. Not wanting to automatically expose every licensor to claims of contributory infringement, and not wanting to lower the standard for intentional inducement, the court held that Gibson’s claims under the first prong failed because “the control exerted by a licensor, without more, is not sufficient to state a claim for contributory trademark infringement.”

The court also found that, under the second prong, Viacom is not “supply[ing] an infringing product to an infringer” because the SpongeBob trademark provided by Viacom is not the instrument of infringement and Viacom cannot control JHS’ actual infringing activity. In other words, although the SpongeBob trademark appears on the infringing products, Viacom could not prevent JHS from making an infringing ukulele that does not bear SpongeBob’s mark. So Gibson’s claims fail under the second prong, too.

Vicarious Infringement

Vicarious liability for trademark infringement requires a party to exercise control over, or have the authority to bind, the primary infringer. Gibson tried to claim Viacom exercised control over JHS based on its license agreement which includes provisions granting Viacom control over the licensed mark, territory and channels of distribution. However, the court disagreed, holding that Viacom’s control under its license agreement does not rise to the level required to make Viacom vicariously liable for JHS’ infringement. As stated above, Viacom can control the use of its SpongeBob mark on JHS’ products, but it cannot control JHS’ actual infringing activity.

Based on the foregoing, the court granted Viacom’s motion to dismiss with prejudice, meaning Gibson is barred from bringing another action against Viacom on the same claim.

What Should Licensors Do?

In light of the above, what should trademark licensors do to minimize their exposure to liability? Every license agreement should include (i) licensor approval rights over all licensed products, as well as rights to monitor and control the quality and distribution of such products because, under the U.S. Trademark Act, ownership of a trademark will be deemed abandoned if a licensor grants unrestricted use of its mark or otherwise fails to control the nature and quality of all products sold under a license, (ii) a statement confirming that the licensee has no power to obligate or bind the licensor in any manner whatsoever, that the parties are independent contractors, and that the parties shall not be deemed in any relationship of partners, joint venturers, agents, subsidiaries or employees of each other, (iii) warranties by the licensee that the licensed products will not infringe, or constitute a misappropriation of, the trademarks or other intellectual property of any third party, (iv) strong indemnification provisions in favor of the licensor covering third party intellectual property infringement and other types of liability claims, (v) a licensee obligation to maintain comprehensive insurance coverage to respond to intellectual property infringement and other claims, and (vi) where appropriate, guarantees from a financially sound corporate parent of the licensee or other entity to ensure the performance of the licensee’s indemnification and other obligations. Including these sections in each license agreement will go far in increasing the likelihood that the licensor’s protections are all squared away.

Oliver Herzfeld is the Chief Legal Officer at Beanstalk, a leading global brand licensing agency and part of the Diversified Agency Services division of Omnicom Group.